Goldman Sachs: Buy HDIL: High earnings visibility, compelling value

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HDIL (HDIL.BO; Buy): High earnings visibility, compelling value
Investment view
We maintain our Buy rating on HDIL, but lower our 12-month FY12E
RNAV-based target price to Rs211 from Rs309 due to a higher discount
for the MIAL project and pushing back our TDR sales assumptions. We
also reduce our FY11E-FY13E EPS by 8%-14% on the back of lower
pricing assumptions in Mumbai.

In our view, the following key revenue drivers appear robust:
 Residential sales: Rational pricing has enabled HDIL to sell close to
4.9 mn sqft of residential property over the past six quarters.
 TDR prices: TDR prices have increased to about Rs3,000/sqft at end-
3QFY2011, as compared with a low of Rs1,420/sqft in 4QFY09, while
TDR volumes remain steady. We factor in a conservative TDR price
of Rs2,500/sqft in our model. This assumes importance as TDRs
contribute about 9% to our FY2012E NAV.
 Mumbai market: The Mumbai market, in which most of HDILs
project are based (see Exhibit 2), remains the most attractive market
in terms of potential, in our view. This market also provides a large
number of reinvestment opportunities. We assume conservative
residential pricing (15%-20% below current levels) and no growth in
FY2012E-FY13E.
Changes in modeling assumptions
 We forecast flat pricing growth in FY12E and FY13E.
 We also assume a delay in the sale of TDRs from the Airport project,
pushing back most of the sales to FY2020E considering slower-thanexpected
progress. As a consequence, we reduce our FY12E RNAV
from the MIAL project to Rs94 per share from Rs 133 per share.
Valuation
 We lower our 12-month RNAV-based target price to Rs211, from
Rs309, to reflect our more bearish selling price assumptions, slower
progress on the MIAL project and lower TDR sales assumptions. We
apply a 30% discount to our FY12E RNAV (10% earlier) on account of
low operating cash flow generation and risk associated with slum
rehabilitation process as well as the risk of lower geographical
diversity.
 The stock is currently trading at 0.6X FY2012E P/B vs sector average
of 1.4X and a FY2012E P/E of 6.3X vs a sector average of 11.1X.
 We estimate HDIL’s FY12E ROE of 10% is broadly in-line with the
sector average of 11%, despite following a more conservative
revenue recognition policy based on project completions (see
Exhibit 36).
Key risks to our thesis
 Execution delays of inherently difficult slum rehabilitation projects,
sharp correction in TDR prices and a fall in Mumbai residential
property demand.